10 Reasons Why The Stock Market Is Not The Economy

James Carville, Bill Clinton’s political strategist came up with the saying “It’s the Economy, Stupid”. However, what is good for the stock market isn’t always good for the economy and vice-versa.

Here are 10 reasons why the stock market is not the economy -

1. 40% of S&P 500 revenues are generated outside the U.S. while exports are 10% of U.S. GDP.  Therefore, global trends have a greater effect on the U.S. stock market than the actual domestic economy.

2. The Stock market value fluctuates based on changes in earnings.  The volatility in earnings is always far greater than the actual change in the economy. 

3. Higher unemployment is good for the stock market because it forces the Fed to lower rates to boost the economy.  Lower rates are good for stocks - but how can high unemployment be good for any economy?

4. The best stock market returns come when the unemployment rate is high and the economy is in bad shape.

5. Stock market returns are lower when the unemployment rate is low.  Low unemployment is a byproduct of a strong economy.  In a strong economy, the Fed is raising interest rates to control inflation.  And given the Fed’s long history of tipping the economy into a recession – investors are worried sick.

6. Strong wage growth is good for consumers but bad for the stock market.  Strong wage growth leads to inflation, can negatively affect corporate margins, and forces the Fed to raise rates. 

7. Higher interest rates are good for savers but bad for stocks.  Higher rates reduce the discounted future value of cash flows and lead to lower stock prices.  

8. Starting in 2009, a tepid recovery (consistent 2% GDP) was ideal for the stock market.  Inflation pressure was very low, rates were low, and stocks rose.  However, low growth doesn’t create enough jobs and real wealth for the majority of the population.

9. An accelerating economy can lead to a strong and rising Dollar.  A rising dollar also triggers risk-off sentiment.  Markets fall when the dollar goes up too fast. 

10. Earnings recessions cause the stock market to go down significantly but may or may not affect the real economy.  We endured an earnings recession in 2016 – when the average Russell 3000 stock fell more than 25% - but the economy avoided a recession.